The Illusion of Active Fixed Income Alpha

4Q18

Do fixed income managers (FI) generate alpha? In this Alternative Thinking, we take a deep dive into the determinants of excess of benchmark returns for a broad set of popular active FI categories (Global Aggregate, U.S. Aggregate, and Global Unconstrained Bond). Our analysis finds that passive exposures to traditional risk premia—primarily term risk, corporate credit risk, emerging markets risk, and volatility risk—explain a majority of FI manager active returns. There is largely no outperformance at the category level after controlling for exposures to well-known traditional risk premia. The implication for asset owners is clear: traditional discretionary active FI strategies offer little in the way of true alpha.

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The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.

Hypothetical performance results have many inherent limitations, some of which, but not all, are described herein. Hypothetical performance results are presented for illustrative purposes only.

Diversification does not eliminate the risk of experiencing investment loss.

Certain publications may have been written prior to the author being an employee of AQR.

This material is intended for informational purposes only and should not be construed as legal or tax advice, nor is it intended to replace the advice of a qualified attorney or tax advisor.

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AQR Capital Management, LLC, (“AQR”) provides links to third-party websites only as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by us of any content or information contained within or accessible from the linked sites. If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which AQR.com has no control. In no event will AQR be responsible for any information or content within the linked sites or your use of the linked sites.

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